The Euro’s Sad Birthday – OpEd


By Vlad Grinkevich

January 1 will mark ten years of Euro cash. This anniversary will be a sad one; the eurozone is going through tough times. The debt crisis that has swept Greece, Portugal, Italy and Spain threatens to develop into a financial downturn that could trigger a new recession. Most experts believe the European currency will survive and that the eurozone will certainly overcome the crisis, even if some members drop out. However, some are convinced that this idea of a common currency has not justified itself.

The presentation of the euro as a new currency took place in 1999, and Euro cash was introduced on January 1, 2002 to replace the ECU – the European Currency Unit. Currently 17 out of 27 EU countries have adopted the euro as their national currency.

“The Euro lived”

The euro is marking its anniversary in difficult circumstances. The eurozone is going through a debt crisis that could grow into a financial and economic one. Meanwhile, experts are discussing whether the introduction of the common currency was justified.

“We have looked at the dynamics of the GDP and industrial production before and after the introduction of the euro, and I have to admit that the formation of the eurozone has not produced any obvious positive effect on macro economic indicators,” says Igor Nikolayev, director of the FBK Strategic Analysis Department.

Other experts argue that the euro has become a locomotive of the development of European and global trade, and that it has allowed investors and states to diversify their assets. Sergei Afontsev, department head at the Institute of World Economy and International Relations, praises the euro: “The euro has become a catalyst in the development of trade within the European Union (EU) and a powerful vehicle of EU trade with the rest of the world. It has become a new reserve currency that was a serious rival to the dollar for a relatively long period of time.”

A blow to the peripheral economies of the EU has become the flip side of the Euro integration that has facilitated trade and movement of capital.

“Integration has aggravated differentiation among the eurozone members,” says Yury Danilov, director of the Center for Stock Market Development. “Germany received additional markers, but this dealt the final blow to the peripheral economies. The gap between them and the leading economies has widened.”

Boris Kagarlitsky, director of the Institute of Globalization and Social Movements (IGSO) believes that the formation of the eurozone not only led to the de-industrialization of peripheral European economies, but that it is a substantial obstacle to their efforts to overcome the crisis. “Less effective industrial zones have proved unable not only to compete, but even to restructure for future competition,” he explains. “The existence of independent currency, one’s own monetary system and the fairly flexible management of budget processes is an indispensable condition for reconstruction and greater competitiveness.”

“The euro is alive”

Many experts agree with Kagarlitsky, but not all. Afontsev believes that the introduction of the common currency helped southern countries to overcome their long-standing problems. By way of example he cites the successful efforts of Greece and Italy to bring down high inflation. As for the current difficulties, Afontsev explains that they are the mistakes of specific governments rather than the integration processes.

“Any good thing has its downside if it is abused. The abuse of cheap borrowing can lead to enormous debt, and this is exactly what these countries have done,” he explains.

Be that as it may, the eurozone is in crisis and there is no light at the end of the tunnel yet. But many economists believe that the euro is passing the test quite well.

“During the ten years of its existence, the euro [cash] has had only one crisis,” Danilov recalls. “Other currencies have gone through worse upheavals in their first ten years, and some did not survive these trials.”

“The euro exchange rate has fallen by just 2% since the start of the crisis early this year. This does not support the apocalyptic predictions that are now being made,” Afontsev says.

Will the Euro live?

The euro’s stability does not rule out the question of the preservation of the common currency space. During numerous meetings last fall, EU heads of state reaffirmed the course towards eurozone integration — but will this goal be achieved?

Few analysts believe in the complete collapse of the eurozone. “The worst-case scenario would be the withdrawal of five or six countries in the south, most likely, not including Italy,” Vladislav Inozemtsev, director of the Center of Studies of Post-Industrial Society said.

Danilov believes that the eurozone will cease to exist if about half of its members leave it, or if France and Germany, the locomotives that carry the problematic economies, walk away. The potential withdrawal of Germany from the common currency space is being discussed, but many experts believe this to be idle chatter.

“The talk about Germany’s potential withdrawal is political speculation,” Danilov says. “Germany has gained more than any other country from the formation of the eurozone and the introduction of the euro.”

Experts are not unanimous on the prospects of the withdrawal of problematic countries from the eurozone. On the one hand, the return of national currencies and their devaluation may encourage the restoration of industry and the development of export industries. Inozemtsev believes that for all that, devaluation of national currencies will serve to aggravate budget problems which will result in destabilization and eventually, in a deep economic recession.

“If the eurozone falls apart, the currencies of the southern countries will be sharply devalued. Their currencies are not worth much anyway, but their devaluation will be accompanied by a serious rise in the value of the currency of northern countries. In turn, this process will reduce the competitiveness and slow down the growth of the economies of the current locomotives,” Inozemtsev concludes.

Finally, the main argument in favor of preserving the common currency space is the impossibility of a peaceful divorce within the eurozone.

“It is impossible to quit the euro because the transaction costs of doing so are exorbitant. The European countries will simply be unable to straighten out the relations that they have developed over the course of nearly 15 years and that are expressed in euros,” Danilov insists. “It will take a lot of time and money to transfer them to national currencies, and there is simply no money for this.”

The views expressed in this article are the author’s and do not necessarily represent those of RIA Novosti.

Ria Novosti

RIA Novosti was Russia's leading news agency in terms of multimedia technologies, website audience reach and quoting by the Russian media.

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